Outlawing upfront commissions won’t see more consumers take out cover or change the behaviour of advisers who habitually provide inappropriate advice. The solution lies in better educated advisers and consumers plus an image makeover for the industry, writes Scott Moses.
Advisers have been led to believe that they add the most value for clients upfront. That’s when they evaluate a client’s situation and determine the level of cover they need, identify the best policy, persuade the client to buy it and secure protection.
This belief has underpinned the case for upfront commissions since the inception of the life insurance industry.
But this deep-rooted belief is flawed.
Admittedly, sometimes the bulk of the heavy lifting is done upfront.
This is a reality for risk advisers who specialise in cover for people in risky professions or with complicated health issues, or who deal with complex business succession and estate planning.
However, most of the time, the average adviser plays an equally important and valuable role throughout the advice process (unless there’s a claim).
Once an adviser recognises this, they realise that they’ve been disproportionately paid, and often not in their favour.
Good advisers add significant value throughout the process. They know that insurance is not a set and forget exercise. They don’t want their clients to carry more cover than they need and can afford therefore they conduct regular reviews. Sums insured and premiums change over time because people change, circumstances change and there are always new products. Advisers may recommend replacing an old policy which no longer provides adequate protection.
Another belief is that a practice’s stage in the business life cycle is the biggest determinant of whether an adviser chooses upfront, hybrid or level commissions, or charges a fee. For example, start-ups rely heavily on upfront commissions for cashflow while mature businesses opt for hybrid or level commissions because they want to build a more sustainable revenue stream.
Yet over 80 per cent of new life policies are sold based on upfront commissions.
Whatever the belief, it’s becoming increasingly clear that upfront commissions don’t make sense. Furthermore, they create a conflict, which must be either properly managed or removed.
Even before the October release of the Australian Securities and Investment Commission’s Report 413: Review of retail life insurance advice, which found 37 per cent of risk advice failed to prioritise the needs of the client, there was a strong imperative for advisers to dump upfront commissions and embrace hybrid commissions or fees.
ASIC’s solution for curbing non-compliant advice and “churning” is an industry-wide review of remuneration structures. This would involve licensees reviewing their business models and providing incentives for strategic life insurance advice.
However, it’s too easy to blame remuneration structures and upfront commissions for the industry’s problems.
The issues are more complicated.
At the same time that some people are being inappropriately advised and oversold insurance, the majority are underinsured and disengaged.
Australia is one of the most underinsured nations in the developed world. According to 2010 Lifewise / NATSEM Underinsurance report, 95 per cent of Australians are underinsured. By comparison, South Korea and South Africa have the highest level of life insurance penetration in the world.
In economically-challenged countries where crime is relatively high and natural catastrophes are a regular occurrence, the importance of cover is front-of-mind.
Locally, the underinsurance problem is compounded by the blasé, laid-backed, “she’ll be right” attitude to life of many Australians plus poor financial literacy, little appreciation for the value of insurance and advice, and a mistrust of financial advisers and life companies.
Education and engagement are central to driving home the importance of insurance. Too many Australians are clueless about the dangers of underinsurance. They believe they’re adequately covered through their industry super fund.
Improving the image of the life industry will also help restore consumer confidence in the advice profession and encourage more consumers to seek cover.
That will require the industry to ensure advisers are properly educated, trained and supervised, and clients fully understand their ongoing obligation to disclosure material facts. Any review into the life industry must also address the vested interests that exist in the vertically-integrated model. It should look at the way life insurers remunerate and engage with advisers as well as the sustainability of product features and pricing.
At the most basic level, the importance of insurance should be part of the national financial literacy curriculum. According to the Australian Bureau of Statistics, total household debt hit a 25-year high in 2013. Personal debt hit $1.84 trillion, equivalent to $79,000 per person. The ABS data suggests Australians are spending big on cars, property and private school fees while being significantly underinsured.
